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Shortly after they get the keys to their new home, customers of IndyMac Bancorp also get a “welcome call.” The friendly telephone reminder lets them know when their first mortgage payment is due and where to send it. Those details help harried homeowners avoid sending their first payment late — a common industry problem. But when the welcome calls started two years ago, they didn’t come from the home lender’s Pasadena, California, headquarters. Instead, they came from an outsourced call center near New Delhi, India.

However welcome customers found the calls, IndyMac’s 4,000 U.S. employees could be excused for having doubts. They knew, after all, that the bank’s offshoring relationship could mean job cutbacks. So IndyMac launched “a very active communications strategy,” says Ashwin Adarkar, executive vice president for corporate strategy and marketing. As it expanded its outsourcing, the 10-year-old home lender said it planned no domestic layoffs, and set a goal of adding 4,000 jobs by 2008, both off- and onshore. “Frankly, we’ve won great support from employees” since then, says Adarkar, despite some early concerned feedback.

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Few companies, of course, share IndyMac’s ability to defuse opposition to an offshoring initiative by promising job growth at home. But then, winning over worried workers is only one problem facing corporations that move work offshore.

IndyMac is not alone in learning that turning over control to a distant third-party vendor means coping with uncertainties about security and intellectual property, not to mention quality control. San Francisco-based Business Engine Inc. also found that ensuring project quality takes careful supervision. And sometimes, as Fremont, California-based Everdream Corp. discovered, it means moving the operation back home.

What to Outsource?

The first questions facing companies, of course, are whether, and what, to outsource. IndyMac’s success with its welcome calls, Adarkar says, represented the first step in a long-term strategy of gradual offshoring. A former McKinsey & Co. partner and leader of its business-process outsourcing (BPO) practice, Adarkar has direct experience with what works in India. Not surprisingly, he lists data entry, transaction processing, and simple reconciliations as wide open for relocation. He thinks the prospects for call centers and other voice processes are more mixed. “Calls from customers are the hardest, because you don’t know where they are going to head,” he says, while “outbound calls to noncustomers are the least delicate and least complex,” and thus easiest to move offshore.

Even the simplest processes may have underlying complexity, though. Take reverification calls, which confirm that the information on a potential borrower’s loan application is correct. Since the calls don’t go to customers, “at first blush you’d say yes, let’s definitely do that overseas,” says Adarkar. But how would IndyMac know that all the calls had actually been made? Because it would be difficult to detect an operator simply skipping some of the calls, and because the penalty for bad loans is so expensive, reverification turns out to be one of the riskier offshore call-center tasks. “This is like a hot-stove test,” says Adarkar. Flunk it, and you’re badly burned.

IndyMac managed to ensure the quality of reverification work in India by requiring progress reports and listening in on some calls. Finally, the bank placed a senior vice president on permanent assignment in India to work with its outsourcing vendor, New York­based ExlService Holdings Inc.

“Loss of control is the foremost concern” in most engagements, says offshoring specialist John K. Halvey, an attorney with Milbank, Tweed, Hadley & McCloy in New York. And control issues are growing more acute, says Halvey, “as the functions being outsourced become more sensitive.” Indeed, IndyMac is now considering offshoring administrative jobs in human resources, finance, and accounts payable.

The Start-Up Curve

For anyone contemplating outsourcing work to a location thousands of miles away, the start-up is easily the most frightening step. Like IndyMac, Business Engine found that putting a manager on permanent assignment in the offshore location allowed the company to work through many of the problems that can plague an effort during that phase, and prevent them from recurring.

In early 2000, the business-software firm faced a severe shortage of Web-literate developers near its large facility in the blue-collar Ontario area of Southern California, and turned to Mumbai, India-based vendor Blue Star Infotech Ltd. to help with basic software test and code work.

Soon after, Business Engine got a scare when it detected Indian employees sharing access codes on its virtual private network. In one case, the company found a single access code in use for 18 hours a day, suggesting that two workers were using the same code. Such lax security immediately gave rise to greater fears. “The next step was to make sure they weren’t exporting information,” says CEO, president, and CFO Doug Dickey. Indeed, loss of intellectual property was a top concern among executives surveyed by CFO, and the number-one worry of those who are currently outsourcing offshore.

Fortunately, Business Engine’s breach was not a case of intellectual-property theft. But the experience helped convince the company that to continue operating offshore without one of its own dedicated managers on the scene — as many companies working with third-party vendors do — would be unwise. So in 2001, Business Engine recruited Neil Mehta, who had specialized in supply-chain and systems integration at Arthur Andersen and Price Waterhouse. His presence eased many security worries. “Having a manager on the scene in some ways makes it more secure than if you had a [U.S. employee] working out of the house,” says Dickey. “Whether the phone line to the office is 12,000 miles or 12 miles, it becomes irrelevant.”

Mehta, 33, who is American-born but of Indian descent, also helped address problems with work quality. Before he arrived, reliance on E-mail communications with California often led to delays of at least a day in answering technical questions from the Indian office, and reinforced a feeling among the 40 Blue Star employees in Mumbai that the offshore work “had no status” within Business Engine.

Poor communication and low morale resulted in a large amount of software with code-writing errors that required “rework” by the team of 60 developers back in California. Training alone didn’t seem to solve the problem. “Even after two years of getting the rework rate down in India, it wasn’t [low] enough,” recalls Dickey. While domestically the rework rate was about 30 percent, “when we first started [in India], we experienced error rates of about 70 to 80 percent.”

When Mehta first arrived, he replaced E-mails with frequent phone calls to California. He also took over the job of assigning Blue Star employees to various Business Engine jobs. Because labor in India is relatively cheap, error rates often can be lowered by simply assigning more people to double-check the work. Mehta set up a system in which each code-writing task “would get reviewed and tested by a peer, who would sign off on the code and the task.” He also installed monthly measurements showing the number of tasks completed on time — factoring in the difficulty of each task — and citing reasons for lateness. By using Business Engine’s own management software to measure offshore performance, he was also able to let onshore managers track some offshore functions on a daily basis. That effort, he says, brought “accountability to the work being done by the people offshore.”

Knowing what functions lend themselves to good measurement, and then tracking them effectively, are the keys to successful outsourcing, according to professor Ravi Aron, an expert in BPO at the University of Pennsylvania’s Wharton School. “There are many processes that cannot be codified,” he says, “but when you find processes that can be, you see how easy things are” (see “Measuring the Miscues,” at the end of this article). At Business Engine, Mehta’s efforts at improving communication and measuring error rates are credited with tightening the operation significantly. Rework is no longer sent back to California, but performed in Mumbai. Better yet, notes Mehta, “that rework is now down to 5 percent.”

“Having someone on the ground there has made a big difference,” according to Dickey, who says that the airfare spent flying Mehta back to California for a week or two every several months is well worth it. “He has a much better handle on what we’re striving for.” That’s important in an environment geared less to design work than to performing repetitive tasks, because Mehta can explain why a particular product specification is important to a customer. “Once you have good specs written, the rates improve dramatically,” says Dickey. Indeed, the level of rework is now the same as it is in Ontario.

Dickey says the company can now build on its success, and is considering moving some business processes offshore. For example, he expects to create several quality-assurance positions in India by the end of the year.

When Things Go Wrong

While the lessons learned by IndyMac and Business Engine now allow them to contemplate moving such higher-level functions as finance overseas, privately held Everdream learned a very different lesson: when to pull the plug on an offshoring deal.

Everdream provides computer desktop management for the likes of Federal Express, ADP, and car-sales giant Sonic Automotive Inc. Like IndyMac’s Adarkar, Everdream CEO Gary Griffiths was no stranger to outsourcing; he was involved in IBM’s successful outsourcing of Thinkpad development work to Bangalore, India, in the early 1990s. “I believe [offshoring] is a necessary part of our economy and world trade,” he says.

In late 2002, Griffiths wanted to bring greater scale to the business by supplementing the 100 employees at its California headquarters and in Charlotte, North Carolina. One candidate for assistance, he says, was Everdream’s 24/7 help desk for its 300 customers. “We viewed our core competency to be in technology development,” he says, not running the help-desk call center. “So we looked to a partner to help move the lion’s share of that business [offshore].”

Sykes Enterprises Inc., a Tampa-based outsourcing provider, offered Everdream call centers in India, Manila, and Costa Rica. “We were nervous enough about the whole offshore thing that we didn’t make the jump to India or Manila,” says Griffiths. Although it meant passing up some savings, he chose Costa Rica. “We figured we’d start near-shore and go the next step later,” he explains.

Before the offshore call center went live last June, Everdream trained 15 Costa Ricans from Sykes in the United States, intending to have those call-center representatives train more individuals back in Costa Rica. In the meantime, there would be a mix of U.S. and offshore operators, with callers sometimes getting the Latin American center and sometimes a U.S. center.

The results were disastrous. Some problems involved a poor reaction by customers to the Spanish accents of the Costa Rican operators. But the bigger problem was that the training the Costa Ricans received clearly had not brought them up to the skill level of their U.S. counterparts. “Any savings we saw in lower salary were outweighed by the loss of productivity,” says Griffiths.

The problem wasn’t just how long the calls took. “Our experience was dismal,” and went way beyond language barriers, says David Boatman, CIO of Charlotte-based Sonic. “We have 200 controllers in our dealerships around the country — basically junior CFOs. They’re running a major operation, and they don’t have a lot of time.” They certainly didn’t want questions like, “Is your computer plugged in?” or “Is there a floppy in the drive?” coming from a help-desk operator. Yet Boatman says it was that kind of “level-one” response the Costa Rican center gave, delaying the critical answer that Sonic people wanted: Is this problem caused by a user, or is it a warranty issue?

“It got so bad I couldn’t keep up with the complaints,” says Boatman. “My interest was in stopping the carnage. The last thing I want to do is worry about PCs. They’re his business,” says Boatman, referring to Griffiths, “but they’re the bane of my existence.” A devoted Everdream customer — then and now — Boatman quickly passed Sonic’s complaints on to Griffiths.

With complaints like Sonic’s pouring in, Griffiths canceled the Costa Rican project and began repatriating the help desk after just three months. “We felt that if we didn’t take significant and rapid action, we would seriously jeopardize our customer base,” and Everdream’s entire business. Upon review, it became apparent that callers were hanging up when a Costa Rican answered the phone — and calling again to try to get a U.S. operator.

Fortunately, Everdream’s outsourcing provider supported the company’s decision. Griffiths says he holds Sykes blameless, and Everdream continues to do other business with the firm: “They were disappointed, too, and were 100 percent behind us in our decision to pull out.”

Where’s the Light Switch?

Getting out of an offshoring deal gone bad isn’t always so easy. “There are many traps for the unwary,” warns Mike Conza of Boston-based law firm Testa Hurwitz & Thibeault LLP. Even when things seem to be going well — as they did during Everdream’s early training sessions — Conza advises his clients to install safety valves. “Put your offshore operation on a short leash, and fund it only on a month-to-month basis at first,” he suggests. If outsourced work belongs within a cost center rather than a revenue center — usually the case in early offshoring arrangements — the penalty from pulling back will be less severe if the proper contractual exit provisions are in place.

“If I had a disaster,” says Conza, “I’d want to be able to shut off the lights as soon as I could.” In Everdream’s case, more and better training could have corrected the situation, acknowledges Griffiths. “But if the learning curve had to be longer, we just couldn’t afford it.” Everdream’s up-front fees for infrastructure, security, training, and flying trainees and executives back and forth, he reports, represented two to four months’ worth of operating expenses — a ratio that appears typical for such small projects.

To be sure, many offshoring ventures end up as financial flops. Although 42 percent of those surveyed by CFO reported savings of more than 20 percent, 10 percent of respondents reported no savings at all. And companies much larger than Everdream have learned similar lessons. Last November, for example, Dell Computer closed down a Bangalore call center servicing high-end Optiplex desktop and Latitude notebooks, returning its help lines to Texas, Idaho, and Tennessee because of what Dell said was dissatisfaction with the level of support customers had been receiving.

In the end, Griffiths says, Everdream’s experience hasn’t soured him on the idea of offshoring. Instead, it has taught him valuable lessons about both outsourcing and Everdream’s perception of itself.

“At the end of the day, we learned what was important for our customers, and the esteem they placed us in for the level of service we’d been providing through the help desk,” he says. “We thought [the call center] wasn’t a core competency for us, but our customers taught us that it was.”

Roy Harris is senior editor at CFO.

Avoiding the Pitfalls

Tips for arranging offshore operations through a vendor.

Design an exit strategy, such as month-to-month contract terms, for the early stages. Allow yourself to back away if goals aren’t met.

Level with employees about U.S. job reductions and cost savings, emphasizing competitiveness and any opportunities for new jobs.

For processes being relocated offshore — whether simple or sophisticated — make sure results, quality, and worker performance can be precisely measured. Then measure them.

Monitor the work being done for security lapses and performance, preferably by putting some of your own managers on-site.

Consult international-law specialists about the tax and labor laws that apply where you will be operating, particularly if you are setting up an offshore subsidiary. (For example, in India employees have certain “moral rights” to the property of their companies, unless a contract expressly deletes them.)

Review U.S. accounting regulations pertaining to offshore operations, such as Statement of Auditing Standards No. 70, “Reports on the Processing of Transactions by Service Organizations.”

Measuring the Miscues

Easily monitored tasks are better candidates for outsourcing.

What’s the best way to make offshoring work? Performance measurement and on-site tracking, says Ravi Aron of the University of Pennsylvania’s Wharton School. Aron has studied the types of errors made, and which can be detected and “codified” easily. Work monitored in that manner may be the best for offshoring.

“Direct” mistakes — like typos in many processed transactions — are easily measured and corrected. By contrast, more-subtle “carry-forward” errors in pricing defy easy detection, and can become embedded in a company’s operations. “Even when you catch a carry-forward error,” the offshore vendor “can point the finger back at you and say, ‘I based it on the data you gave me,'” says Aron.

Complexity alone doesn’t disqualify corporate activities from offshoring, because some extremely complicated functions lend themselves to precise measurement. Conversely, undetected errors in some simple-sounding operations, such as certain call centers, can expose a company to major damage. Below is a sampling of tasks and their risk levels.